How Equity Became A Household Word
Readers suggested a topic on debt and lifestyle. “Given that incomes for most quartiles has been flat in real terms over the past few decades, why have people borrowed and then spent as if their incomes were growing? We wouldn’t be in as big a mess as we are now if everybody simply lived within their means. Instead a very large proportion of the US has borrowed and lived beyond their means. Yes, there are always some people who will borrow their way to the poor house. But ISTM that ever greater levels of indebtedness have become the norm rather than the exception.”
“Is credit to easily available? Are rates too low? Is the boomer cohort at a spending, rather than saving age? Have advertisements suddenly become more effective at making people want things? All else being equal, in the face of flat real wages one would anticipate flat real spending, not greater spending funded by greater debt. There’s something else in the equation, and I’m not sure what it is.”
A reply, “I wonder if there are historical stats for loan (mortgage?) applications vs those that are granted? It’d be interesting to see if there has been an increase in applications in percentage terms. Of course that doesn’t control for people moving houses more frequently (thus more mortgages), and for increased size of mortgages due to banks being willing to lend more.”
One said, “I think people just didn’t understand the relationship between the interest rate, the length of the loan and the monthly payment. Using a very simple case, if the mortgage pusher says you can refi your mortgage, have a lower payment and get $20,000 cash, are most people going to realize that they have added 15 years to their mortgage pay off date and handed a $10,000 fee to the bank? Maybe, but maybe not.”
“And this is even before you ask if they realized that they converted their fixed rate fully amortizing loan to an adjustable rate, negative amortization loan with a 6 month teaser rate.”
Another added, “The easy availability of credit at low rates allowed people to achieve the lifestyle that the media told them they deserved. The only thing I’d add is that the above reasons produced an attitude change; that might be the something else in the equation. So many people seem to think that having a load of debt is natural without understanding the true cost of it.”
“One thing I noted was how ‘equity’ became a household word. The old system was you bought a house and enjoyed seeing the slow reduction in the mortgage balance; it was debt focused. The new system was to buy a house and brag to everyone how quickly your equity was building. It didn’t even matter if the debt was shrinking as long as your equity was going up. The switch from debt focus to equity focus was, in my mind, a brilliantly retarded move.”
One pointed out, “didn’t they used to teach basic finances in Home Economics back in the day? I did take a business ‘elective’ in high school which taught about budgeting, types and cost of insurance, investments, etc. But it was an elective.”
“Perhaps folks are simply lacking a basic education in financial matters that happened to be part of the core curriculum ‘back in the day’?”
And finally, “My guess is that the average person was more dependent on the bank to determine what they could handle than the average HBB participant might have originally thought. Combine a rah-rah atmosphere where it looks like everybody is getting rich and living the good life and have the bankers cut the brake lines and color it all with the assumption that housing always goes up and here we are.”
The Virginian Pilot. “Nearly one in four homes with a mortgage in Hampton Roads - 24 percent - is worth less than what is owed on the loan, according to CoreLogic. The firm’s quarterly report said 22,967 more mortgages in the region will be underwater if home prices decline 5 percent from current levels. ‘A lot of people who want to move up, they’re not going to move up until they sell their existing homes,’ said Vinod Agarwal, an economist at Old Dominion University. ‘So that reduces the number of buyers in the market.’”
“Across the country, the number fell slightly to 10.9 million, down from 11.1 million at the end of 2010, the firm reported. That represents about 22.7 percent of all residential properties with a mortgage nationwide. The highest concentration of underwater loans was in Nevada at 63 percent.”
From KPTV Portland. “Home prices in the biggest metro areas across the country have reached their lowest level since 2002, according to a price index. And 12 housing markets, including Portland, are seeing home prices at the lowest level since 2006. ‘Basically, you have a lot more people who were mortgaged right up to the hilt. And then when the price decline came, they were under water. The estimate for Oregon is that a third of our homeowners right now are under water,’ says Portland State University professor Gerry Mildner.”
From CNN Money. “The economy is still struggling. And Americans are in for a long and painful adjustment period. One major reason: their own household debt. The bubble economy that led to the recession was fueled by American consumers, businesses and banks taking on too much debt, particularly in real estate, during the decade before the crisis.”
“Total private sector debt — held by consumers and businesses combined — peaked at 283% of gross domestic product in early 2008 — nearly three times the size of the entire economy.”
“The good news is that since the recession, consumers have been paying off debt and saving more. Private debt fell to 234% by the end of last year, though much of that decline resulted from bad mortgage debt shifting from banks to the government through the bailout of mortgage finance giants Fannie Mae and Freddie Mac, said Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics and a leading expert on financial crises.”
“But even with some modest improvement in savings in recent years, households still can’t afford the current debt levels, which are well above the average disposable income. ‘At least households are being prudent and rational and bringing the debt down. But I worry we’ll see it leveling off higher than I think it should,’ said David Wyss, a visiting fellow at Brown University and former chief economist at Standard & Poor’s.”
“Stephen Roach, the chair of Morgan Stanley Asia, wrote a recent note suggesting that American consumers were turning into ‘zombie consumers,’ greatly because ‘burdened with underwater mortgages, excessive debt, and subpar saving, U.S. consumers are stretched as never before.’”
“And the process of unwinding those huge debt loads is slow going. Despite Americans paying down debt, saving more of their paychecks, and shedding some of their debt through bankruptcy and foreclosure, Reinhart estimates that the amount of consumer debt alone has declined to only about 92% of the gross domestic product.”
“That’s down from only 98% at its high point at the end of 2007 — a peak that shot up from less than 70% in 1999. ‘The deleveraging process doesn’t really get underway quickly,’ Reinhart said.”
From WCTV. “In Kissimmee, Florida the mortgage crisis hit Areliz Martinez-Rodriguez. Martinez-Rodriguez says, ‘I purchased the house for 255 and right now, the house is for 87 thousand dollars.’ The biggest investment of her life withering away in a market chilled by one of the nation’s highest rates of foreclosure. ‘I’m stressed out because I need a house for my kids and for me and I’m trying to work with the bank and the bank doesn’t want to work with me.’”
“When Donna Thomas’ real estate company of 40 years went under during the mortgage crisis, she lost everything she was saving for retirement. Thomas says, ‘We basically had to give up our regular insurance and go to an HMO and we’ve had to cut back on everything.’”
